INFLATION AND QUANTITATIVE EASING

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In 1910, the bankers who devised the Fed, agreed an important function of the central bank was to protect against bank runs in the event of an economic crash. Because banks are required to keep only 10% of their customers’ deposits, a mass of people rushing to close their bank accounts would quickly deplete a bank’s reserves. This is where the idea of government protected insurance came in. Why not let taxpayers protect bank customers? And thus the FDIC (Federal Depositor Insurance Company) was born.

In the aftermath of the 2008 economic crash, in effort to keep banks solvent, the Fed (unbeknown to anyone at the time) injected $1.65 trillion into the banking system. This was Quantitative Easing 1 (QE1) which lasted from November 2008 - March 2010. It was a huge success. The banks got lots of cheap money and no big bank ran out.

            But the economy wasn’t growing very well, and the country stood on the brink of recession, and to get banks lending and money circulating, the Fed implemented QE2, and injected $600 billion into the economy. That lasted from November 2010 until June 2011.

 Now, with the economy still sluggish, and banks still not lending to the public, the Fed is embarking on QE3, and planning to inject $40 billion a month into circulation.

            Where is it getting this money? It is printing it. As readers of the last post know, printing money dilutes the value of money already in circulation. The banks get free money, and the value of the dollar for everyone else is worth less. Quantitative Easing is a great boon to the banks. Not so great for the people.

             Why isn’t there inflation with all this money added to the circulation? Because it has been given to the banks and they’re holding on to it. They’re not lending it out to people, they’re playing the stock market. The general population hasn’t been the beneficiary of any Fed money. It was the big banks. As Senator Dick Durban knows, money is power. In 2009, he said, "And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place."